Humber/Ontario Real Estate Course 3 Exam Practice

The ratio of principal, interest, and tax payments plus other personal debt to an applicant’s gross monthly income is called the:

1. Blended debt service ratio.

2. Gross debt service ratio.

3. Total debt service ratio.

4. Total principal debt ratio.

5. Interest-only ratio.

6. Adjusted debt ratio.

The correct answer is: Total debt service ratio.

The Total Debt Service (TDS) ratio is an important measure used in the evaluation of an applicant's ability to manage monthly payments on debt. It encompasses not only the principal and interest payments associated with a mortgage but also includes any property taxes and other personal debt obligations, and then calculates this total as a portion of the applicant's gross monthly income. By taking into account all monthly debt obligations, the Total Debt Service ratio provides lenders a comprehensive view of the applicant's financial commitments. This helps to assess whether the applicant is within a manageable range of debt relative to their income and can therefore afford additional borrowing, like a new mortgage. In contrast, the blended debt service ratio primarily refers to a combination of various interest rates on loans rather than a precise measure of income versus total monthly debt payments. The gross debt service ratio, while somewhat related, typically focuses only on the costs associated with housing (mortgage, taxes, and heating), excluding other debts. The other options, such as total principal debt ratio, interest-only ratio, and adjusted debt ratio, do not accurately represent the concept being asked about regarding the comprehensive relationship between total monthly payments and gross income.